Assume that the economy is in a mild recession, and as a result interest rates and money costs generally are relatively low. The WACC for two mutually exclusiveprojects that are being considered is 8%. Project S has an IRR of 20% while Project L's IRR is 15%. The projects have the same NPV at the 8% current WACC.However, you believe that the economy is about to recover, and money costs and thus your WACC will also increase. You also think that the projects will not befunded until the WACC has increased, and their cash flows will not be affected by the change in economic conditions. Under these conditions, which of thefollowing statements is CORRECT?a. You should recommend Project S, because at the new WACC it will have the higher NPV.b. You should delay a decision until you have more information on the projects, even if this means that a competitor might come in and capture this market.O c. You should recommend Project L because it will have the higher IRR at the new WACC.d. You should recommend Project L, because at the new WACC it will have the higher NPV.O e. You should reject both projects because they will both have negative NPVS under the new conditions.

Answer: Option A is the Correct Answer

sume that the economy is in a mild recession, and as a result interest rates and money costs generally are relatively jects that are being considered is 8%. Project S has an IRR of 20% while Project L's IRR is 15%. The projects have wever, you believe that the economy is about to recover, and money costs and thus your WACC will also increase. ded until the WACC has increased, and their cash flows will not be affected by the change in economic conditions. lowing statements is CORRECT? O a. You should recommend Project S, because at the new WACC it will have the higher NPV. O b. You should delay a decision until you have more information on the projects, even if this means that a competitor might c O c. You should recommend Project L because it will have the higher IRR at the new WACC.

sume that the economy is in a mild recession, and as a result interest rates and money costs generally are relatively jects that are being considered is 8%. Project S has an IRR of 20% while Project L's IRR is 15%. The projects have wever, you believe that the economy is about to recover, and money costs and thus your WACC will also increase. ded until the WACC has increased, and their cash flows will not be affected by the change in economic conditions. lowing statements is CORRECT? O a. You should recommend Project S, because at the new WACC it will have the higher NPV. O b. You should delay a decision until you have more information on the projects, even if this means that a competitor might c O c. You should recommend Project L because it will have the higher IRR at the new WACC.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 21P: Your division is considering two investment projects, each of which requires an up-front expenditure...

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